US economy powers ahead as stimulus boosts demand

The American economy powered ahead at the end of last year as the United States continued to spend its way out of recession, with government stimulus money helping to create a surge in consumer spending.

US economic growth advanced to 3.2pc in the final three months of 2010, official figures indicated yesterday, as Americans spent at the fastest pace in four years and companies sold more goods and services overseas.

Although the US growth figures were lower than the 3.5pc that had been forecast by economists, they were strong enough to elicit a sigh of relief from the administration of US president Barack Obama, which took a gamble last year by going into mid-term elections on a programme of raised spending and the maintenance of Bush-era tax cuts.

The US economy continues to face challenging headwinds from a volatile housing market and a stubbornly high unemployment rate.

The Federal Reserve said this week that the economic recovery was continuing but that growth was not fast enough to generate "significant" labour market improvement.

Many economists are expecting faster growth this year and raised their forecasts after Republicans and Democrats agreed to a fiscal deal last December that cut payroll taxes to stimulate spending.

The credit-rating agency Moody's said that it might have to downgrade America's premier AAA rating because of the Government's failure to tackle its growing budget deficit.

It is on track to hit a record $1.5 trillion, or 9.8pc of GDP, this year.

IMF warning

The International Monetary Fund warned this week that "the absence of a credible, medium-term fiscal strategy" in the US, coupled with persistently weak labour and housing markets, meant that the stimulus would deliver only a relatively small growth dividend at a considerable fiscal cost.

Dan Greenhaus, an economist with Miller Tabak, said the low cost of borrowing meant that there was little immediate pressure on the US to reduce its deficit. However, he suggested that Americans were "idiots" to believe that they could carry on increasing spending and cutting taxes.

"As the US economy builds up a head of steam, the process of reducing public sector spending can begin," Mr Greenhaus said.

Although the American approach produced notable results in the near term, British-style cutbacks probably would produce the more effective medium to long-term solutions, he added.

Dean Maki, an economist with Barclays Capital in New York, was more optimistic, believing America's growth was being driven by the private sector, not government spending.